John Hood: Drilling Benefits Exceed the Costs

Saturday

Jan 20, 2018 at 12:24 PM

By John Hood

RALEIGH — If energy companies respond to the Interior Department’s recently announced process for pursuing oil and gas exploration off the North Carolina coast, it is likely that residents or visitors will never see any rigs, pipelines, or depots, as these facilities are located either far offshore or off the beaten path.

What North Carolinians could well see, if such exploration discovers economically recoverable energy assets, is a substantial contribution to job creation, income gains, and public revenues — but only if the federal government sides with North Carolina’s congressional delegation, which mostly favors offshore exploration, rather than North Carolina’s governor, who opposes it.

Taking note of the fact that Florida Gov. Rick Scott successfully lobbied Interior Secretary Ryan Zinke to exclude the Sunshine State’s offshore energy reserves from exploration, Roy Cooper has asked Washington for similar treatment. “Offshore drilling holds the same risks for North Carolina as it does for Florida,” Cooper said, “and North Carolina deserves the same exemption.”

There are certainly some risks associated with offshore drilling, as there are with pretty much any large-scale enterprise. Sensible policymaking requires a careful assessment of the probabilities and likely consequences of adverse events, as well as a careful assessment of the probabilities and likely consequences of things going well.

Mike Walden, an economist at North Carolina State University, did just that several years ago in a cost-benefit analysis of offshore energy exploration. So did University of Wyoming economist Timothy Considine. Both looked at estimates of offshore energy reserves, a range of estimates for future market prices, and the potential effects of oil spills or other problems.

While using different methodologies, Walden and Considine came up with similar results, as Walden explains in his book North Carolina Beyond the Connected Age: The Tar Heel State in 2050, just out from the University of North Carolina Press. The scenario Walden described as most likely suggested that offshore drilling would boost North Carolina’s gross domestic product by $1.9 billion a year, its permanent employment by about 17,000 jobs, and annual government revenues by $116 million. In Considine’s mid-range scenario, his growth projections were $1 billion in GDP, about 15,000 jobs, and $171 million in revenues.

What about the environmental risks? Using standard assumptions and historical probabilities, the two scholars came up with projections denominated as dollars of GDP. Walden put the potential cost of spills at $83 million a year. Considine computed a broader range of potential environmental costs, including emissions, at $92 million a year.

Cost-benefit analysis isn’t the only way to think about controversial issues, to be sure. I think of it only as one tool among many. It doesn’t work like some supercomputer from a 1950s science fiction story. You don’t feed in a question and receive a perfectly dispassionately, irrefutable answer. Policy disputes often arise from differences in the definition of terms or first principles, which clearly can’t be settled by statistical analysis.

However, in cases like offshore drilling where everyone is generally defining their terms in the same way and empirical evidence exists from which to draw patterns and make predictions, cost-benefit analysis is a useful means of placing risks and returns along the same continuum, so they can be productively compared.

It seems to me that when it comes to energy exploration off the North Carolina coast, the potential benefits clearly surpass the potential risks. There are highly traveled tourist destinations in many places around the world that have coexisted with offshore drilling for decades.

North Carolina “has the largest estimated reservoir of offshore oil supplies of any state on the East Coast,” Walden notes. I find it hard to believe that such an asset ought to be, and will be, kept off the market, particularly as the technologies and best practices for offshore exploration continue to get safer and more efficient. Gov. Cooper and other drilling foes may have the best of intentions. But North Carolina will be better off if their objections are noted, weighed against the evidence, and overruled.

John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on “NC SPIN,” broadcast statewide Fridays at 7:30p and Sundays at 12:30p on UNC-TV.

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